2022 (4) TMI 904 - AT - Income Tax

Revision u/s 263 by CIT - set off of brought forward business loss from the income assessable under the head 'Capital Gain' - gain of depreciable assets by entering into long term lease agreement - HELD THAT - As stated earlier, the assessee is engaged in the business of developing leasing out commercial properties. The activity of leasing such constructed spaces is undeniably its core business activity - these properties constructed by the assessee are its 'business asset' reflected by way of 'Fixed Asset'. Undisputedly, the income derived from leasing these fixed assets on short term basis has all along been taxed as 'Business Income'. Under the scheme of the Act, the income from grant of long term capital leases results in deemed transfer of fixed assets, and therefore by way of operation of deeming fiction set out in Section 50 of the Act, the excess/ gain over the WDV of the fixed asset has to be taxed as 'Short Term Capital Gain'. It cannot be denied that the act of entering into 'long term leases is the business activity of the assessee and the income, which is assessed by way of capital gain, bears the character of profits or gain derived from such leasing business. Hence, irrespective of under which head such income is taxable ( short term capital gain in the present case), we are of the view that, the loss assessed under the head Profits Gains of Business or Profession in the preceding years and brought forward to the relevant year had been rightly claimed as set off against the profits or gain derived from long term leases assessed under the head 'Short Term Capital Gain'. AO had applied his mind to this particular claim of the assessee in the earlier years and had been accepted and, therefore, when the same claim had been raised in the relevant year as well, the AO had rightly accepted it, in absence of any change of facts or position of law, which permeated through the earlier assessment years. In our view therefore, the AO could not have disturbed the aforesaid settled position. For that, we rely on the decision of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT AO had correctly allowed the set off of brought forward business loss against the short term capital gain in the relevant year and therefore AO's order cannot be termed as 'erroneous' for paving way to invoke the revisional jurisdiction of Ld. Pr. CIT under of Section 263 of the Act. In the instant case that, although the assessee had explained the above issue in detail to the Ld. Pr. CIT supported with judicial precedents, the Ld. Pr. CIT however did neither himself examine this issue nor recorded his own finding proving that the explanations furnished by the assessee suffered from any infirmity and because of which he found that the view adopted by the AO was unsustainable in law making his order as erroneous within the meaning of Section 263 of the Act. In our opinion, once the Ld. Pr. CIT initiates the proceedings u/s 263 of the Act for specific reasons and these reasons are met by the assessee, then it was incumbent upon the Ld. CIT to himself independently deal with the objections and record his own satisfaction to prove that the AO's order is in fact erroneous and prejudicial to the interests of the Revenue for the reasons out in the SCN. CIT in such a situation cannot merely set aside the assessment order directing AO to pass the order of assessment afresh, effectively giving the AO a second innings without establishing that the assessment order was indeed erroneous as well as prejudicial to the interests of the Revenue. CIT merely setting aside the AO's order without independently dealing with merits of the issue was untenable and therefore the same is set aside. We hold that the AO s order cannot be held to erroneous as well as prejudicial to the interest of the revenue - since AO s order is valid in the eyes of law as per the law laid by the Hon ble Supreme court and various other High courts, we find that the Ld. Pr. CIT erred in interfering/interdicting the order of the AO on this issue. Appeal of assessee allowed.

Summary

Issues Involved:
1. Usurpation of jurisdiction by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income-tax Act, 1961.
2. Erroneous and prejudicial nature of the Assessing Officer's (AO) order.
3. Set-off of brought forward business loss against short term capital gain.

Detailed Analysis:

1. Usurpation of jurisdiction by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income-tax Act, 1961:
The assessee challenged the jurisdiction of the Pr. CIT to invoke revisional powers under Section 263 of the Act, arguing that the assessment order passed by the AO was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal examined whether the Pr. CIT had the requisite jurisdiction to assume revisional powers by referring to the judicial precedence laid down by the Hon’ble Supreme Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC). According to the Supreme Court, the twin conditions of the order being erroneous and prejudicial to the interests of the Revenue must be satisfied for the Pr. CIT to invoke Section 263.

2. Erroneous and prejudicial nature of the Assessing Officer's (AO) order:
The Tribunal scrutinized whether the AO’s order was erroneous and prejudicial to the interests of the Revenue. It was noted that the AO had allowed the set-off of brought forward business loss against short term capital gain, which the Pr. CIT deemed irregular, resulting in an undercharge of tax. The Tribunal emphasized that the AO’s order could only be considered erroneous if it was based on incorrect facts, incorrect application of law, violation of natural justice, lack of application of mind, or inadequate investigation.

3. Set-off of brought forward business loss against short term capital gain:
The Tribunal analyzed the merits of the assessee’s claim for set-off of brought forward business loss against short term capital gain. The assessee argued that the gain derived from long-term capital leases, although deemed as short term capital gain under Section 50 of the Act, continued to be profit derived from the business of leasing properties. This position had been accepted by the Revenue in earlier years. The Tribunal referred to Section 72 of the Act, which allows set-off of business losses against profits of any business carried on by the assessee. The Tribunal also cited the Hon’ble Supreme Court's decision in Cocanada Radhaswami Bank Ltd. (57 ITR 306), which held that business losses could be set off against income from business assets, even if such income was classified under a different head.

The Tribunal noted that the AO had examined this issue in earlier assessment years (AY 2015-16 and AY 2016-17) and had accepted the assessee’s claim after due enquiry. The AO for AY 2017-18, being the same as for AY 2016-17, had rightly accepted the claim in the absence of any change in facts or law. The Tribunal concluded that the AO’s order was not erroneous, and the Pr. CIT’s action under Section 263 was unjustified.

Conclusion:
The Tribunal held that the AO had correctly allowed the set-off of brought forward business loss against short term capital gain, and the AO’s order was neither erroneous nor prejudicial to the interests of the Revenue. The Pr. CIT’s order was quashed, and the appeal of the assessee was allowed. The Tribunal emphasized that the Pr. CIT should have independently dealt with the merits of the issue before setting aside the AO’s order.